SANUWAVE Health, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; filed May 6, 2015. SANUWAVE develops acoustic shockwave technology for regenerative medicine. It had no U.S. commercial product sales; revenue came primarily from international sales of CE-marked devices and accessories. Its lead U.S. product candidate, dermaPACE, was in a supplemental Phase III study for diabetic foot ulcers.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Revenue | $210,452 | $145,098; up 45% |
| Gross profit / margin | $151,634 / 72% | $126,761 / 87% |
| Operating expenses | $1,278,529 | $2,146,560 |
| Operating loss | ($1,126,895) | ($2,019,799) |
| Net loss | ($1,159,115), or ($0.02) per share | ($2,563,954), or ($0.06) per share |
| Cash used in operations | $1,080,154 | $2,120,800 |
Cash and cash equivalents were $2,454,199 at March 31, down from $3,547,071 at year-end 2014. Current assets were $2,936,277; working capital was negative $3,250,331. Total liabilities were $6,186,608, including $5,372,743 of unsecured related-party notes bearing 6% interest and due August 1, 2015. Accumulated deficit was $89,343,238. No financing cash was raised in Q1 2015.
Material changes versus Q1 2014
- Revenue increased $65,354, primarily from higher orthoPACE device sales in Europe.
- Gross margin declined from 87% to 72%, as device sales—which have lower margins than applicators—made up a greater share of revenue.
- Research and development expense fell 17% to $634,623, mainly because fewer clinical-study patients were active. General and administrative expense fell 56% to $566,292, primarily reflecting lower consulting costs after the 2014 capital raises.
- Other expense decreased to $32,220 from $544,155, chiefly because Q1 2014 included interest expense on notes repaid that March. Q1 2015 also included a $56,026 gain from warrant revaluation.
- Operating cash use declined 49%; however, cash still fell by $1,092,872 in Q1 2015. The 15,570,852 Series B warrants expired unexercised in March 2015. The remaining Series A preferred shares converted into 2,330,000 common shares in January 2015.
Outlook, risks, and unusual items
- Going concern and funding: The filing states the business depends on raising additional capital during or before Q3 2015. Management said existing resources should fund operations into Q3, but gave no assurance. It estimated 2015 operating cash use at approximately $400,000–$500,000 per month. Management cited possible strategic investment or partnerships, licensing, equity or debt financing, warrant conversion, or other arrangements; these could substantially dilute shareholders. If financing efforts fail, the company may need to seek bankruptcy relief. The financial statements include no adjustments for a possible failure to continue as a going concern.
- Clinical and regulatory risk: The independent Data Monitoring Committee found no safety issues but reported that the trial’s monitoring success criterion for 100% wound closure at 12 weeks had not been met at the interim review of 130 patients; assuming similar trends, it was unlikely to be met at the next planned analysis of 170. The company was discussing requested later-timepoint data with the FDA. FDA feedback was expected by the end of the quarter and would inform whether to stop enrollment, lock and unblind the database, and potentially submit a PMA in late 2015, or continue the study. The timing and outcome remained uncertain.
- The prior pivotal trial did not achieve statistical significance on its 12-week primary endpoint. The company reported statistical significance at 20 weeks and on certain secondary analyses, but these findings do not remove the regulatory uncertainty.
- Management expected operating losses to continue for several years. Product development, clinical results, regulatory approval, commercialization, reimbursement, and financing are significant uncertainties.
- The company disclosed ordinary-course litigation, with management not expecting a material adverse effect, and a previously identified material weakness related to accounting for complex financial instruments and derivatives. Disclosure controls were considered effective; management added use of outside accounting consultants as needed.
Key facts investors should verify
- Whether the company obtained sufficient capital, extended or otherwise addressed the $5.37 million related-party notes due August 1, 2015, and maintained liquidity beyond Q3 2015.
- Subsequent FDA feedback and decisions on the dermaPACE trial, including whether enrollment continued and whether a PMA filing was made.
- Actual monthly cash use versus management’s $400,000–$500,000 estimate, and the company’s ability to fund clinical and operating commitments.
- Future revenue and gross-margin trends, given the small international revenue base and lower margins on device sales.
- Potential dilution and warrant-related effects: 34,992,686 warrants remained outstanding at March 31, 2015, and 63,056,519 common shares were outstanding as of May 4, 2015.